As part of the programme to mark 20 years since the creation of the Scottish Parliament, SPICe will publish twenty “20 year” blog posts on SPICe Spotlight over the course of 2019. This is the first in the series. Our earlier post sets out more information on the programme and the series of blogs.
The first 20 years of the Scottish Parliament has seen a seismic shift in how debt and debtors are treated. This blog charts a potted history of debt policy since the Scottish Parliament first met in 1999.
Figure 1: Total outstanding UK-wide consumer credit lending to individuals, seasonally adjusted, 1999/00-2018/19
Source: Bank of England
The graph above shows the increase in consumer borrowing from UK financial institutions since 1999. The figures represent consumer credit borrowing, such as loans and credit cards. Consumer borrowing is now three times higher than it was in 1999, suggesting debt policy will remain relevant to the Scottish Parliament for some time to come.
Poindings and public protests
Poindings and warrant sales were a form of debt enforcement very much associated with the poll tax. Court officers could force their way into homes to value debtors’ personal possessions (poinding), which could then be sold at auction (warrant sale).
Detractors noted that poindings and warrant sales were rarely successful in raising money for creditors. This was evidenced by the small number of warrant sales in comparison to poindings. Instead, they argued that poindings worked as a threat. Debtors could be driven to borrow from other sources (including illegal and high interest lenders) to avoid the humiliation of a poinding.
The first successful Member’s Bill of the Scottish Parliament was Tommy Sheridan’s Abolition of Poindings and Warrant Sales Act 2001. It gained the support of a majority of MSPs and was responsible for removing the procedure from the statute book.
Poindings and warrant sales were replaced by the exceptional attachment order – which contained significantly more debtor protections – via the Debt Arrangement and Attachment (Scotland) Act 2002.
Statutory space to repay debts
The 2002 Act also introduced the Debt Arrangement Scheme. This provided a statutory framework to allow debtors time to repay their debts without the threat of court action from creditors.
In policy terms, this was a game-changer. The Debt Arrangement Scheme offered legal protection from creditors without forcing the sale of a debtor’s assets.
This was in stark contrast to the insolvency processes otherwise sanctioned by legislation – such as bankruptcy and the protected trust deed. These options usually resulted in the sale of all a debtor’s non-essential assets, including a family home.
The Debt Arrangement Scheme also provided a way to bypass unco-operative creditors – as they could be forced to accept reasonable repayment offers. This was a significant improvement on informal negotiations with creditors, which are relied on by the vast majority of debtors.
However, debtors needed to be able to repay their debts in full (although over an extended period) to be able to enter the Debt Arrangement Scheme. This made it unsuitable for those with a high level of debt compared to income (including many low-income debtors). Despite many tweaks over the years, the Debt Arrangement Scheme has never achieved the levels of take-up from debtors originally hoped for.
Figure 2: Approved Debt Arrangement Scheme payment plans by quarter, 2006/07-2018/19
Source: Accountant in Bankruptcy
The spike in approvals shown above correlates with reforms in 2011. These enabled a wider category of advisers to offer access to the Debt Arrangement Scheme, including those who charge for their services. Numbers have since dropped back to close to 2010 levels.
The framework for bankruptcy was significantly reformed by the Bankruptcy and Diligence etc. (Scotland) Act 2007. One of the specific aims was to remove some of the risks associated with bankruptcy to promote a more entrepreneurial culture.
The main changes were:
- reducing the period a bankruptcy ran for – this meant a debtor could be discharged from the legal effects of bankruptcy after one year rather than three. The most significant effect of bankruptcy is usually that a trustee acting for creditors takes ownership of all a debtor’s non-essential assets
- the introduction of bankruptcy restrictions orders and undertakings – these extended the restrictions (eg. on borrowing or holding directorships) associated with bankruptcy where a debtor was dishonest or unco-operative
- the introduction of income payment agreements and orders – which required a debtor to contribute to repaying creditors from any surplus income they earned
- creating a more informal application process, so that a debtor could apply for bankruptcy to a Scottish Government agency – the Accountant in Bankruptcy – rather than the courts.
Figure 3: Number of bankruptcies in Scotland by quarter, 1999/00 to 2018/19
Source: Accountant in Bankruptcy
Note that between 1999 and 2004, only an annual total of the number of creditor petitions for bankruptcy is available. This figure has been averaged to provide approximate quarterly data.
Figure 3 shows a significant increase in the number of bankruptcies at the time these reforms were made. However, it is difficult to disentangle the impact of the reforms from that of the 2008 financial crisis.
One of the factors contributing to the spike in bankruptcies in 2008 was the introduction of the Low Income, Low Assets route. This is discussed below.
The smaller spike in quarter 1 of 2012/13 represents the effect of an increase in the fee paid by debtors to apply for bankruptcy. Debtors rushed to get applications in before the fee increase, and numbers dropped directly afterwards.
The 2007 Act recognised that debtors with a low income and few assets had problems accessing bankruptcy. To become bankrupt, a debtor had to demonstrate that they were insolvent in one of the ways set out in legislation. This usually required a creditor to have taken court action against them.
However, creditors generally do not take court action against debtors with no obvious assets. This is because, to enforce payment of a court award, they need to be able to seize a debtor’s assets. Without a means of enforcement, court action is pointless.
So, low income debtors, with no obvious way to repay their debts, could often be stuck with no way out. They could face ongoing pressure from creditors to repay – but this was unlikely to move to court enforcement, which would have opened the door to bankruptcy.
The “Low Income, Low Assets” route into bankruptcy created by the 2007 Act addressed this problem directly. It was available to people whose income was below full-time national minimum wage earnings, and who owned assets worth not more than £10,000. It enabled them to apply for bankruptcy without demonstrating apparent insolvency.
The spike in bankruptcies between 2007 and 2008 in figure 3 above reflects, to a large extent, the impact of this reform.
Bankruptcies more than doubled in the first two quarters after Low Income, Low Assets bankruptcy was introduced. The numbers going through this process have since tailed off, but this was to be expected once the pent-up demand for access to bankruptcy was dealt with.
The last significant reform of debt policy was the Bankruptcy and Debt Advice (Scotland) Act 2014.
The 2014 Act sought to pull back from some of the more debtor-friendly reforms of the 2007 Act. One of the Scottish Government’s stated aims was “securing the best return for creditors” by balancing the rights and needs of debtors and creditors.
The headline changes were:
- requiring debtors to receive money advice from an approved adviser before entering any statutory debt solution (including bankruptcy)
- extending the standard period of bankruptcy from one to four years
- replacing the Low Income, Low Assets route into bankruptcy with the “Minimal Assets Process” – this served a similar function but had stricter entry criteria. However, due to reduced administration costs, the Accountant in Bankruptcy has been able to cut the fee for a debtor application.
The impact of these reforms can be seen in the dip in the number of bankruptcies 2015/16 onwards, as shown in figure 3 above. Bankruptcies have increased again since quarter one of 2015/16, but not – as yet – to pre-reform levels.
Problem debt seems unlikely to go away any time soon. So, the challenge for the Scottish Parliament is to balance the competing needs of debtors and creditors.
Key issues are likely to be:
- examining barriers to bankruptcy – the current £200 application fee for a full bankruptcy and the likely loss of the family home are potential problems
- supporting those who want to repay their debts – the Debt Arrangement Scheme was an innovation, but it appears to have missed its target audience
- making the most of new powers which devolve the funding of debt advice via a levy on financial service providers.
Abigail Bremner, SPICe researcher, civil justice